European buyouts down 16% in H1 – report

Mega buyouts made up nearly a third of total investment value for the period and was the only investment stage that grew annually, according to a report from Invest Europe.

Buyout M&A in Europe in the first six months of the year showed a period divided.

While on the one hand European buyout investments recorded better than expected volumes in the first half of the year despite the coronavirus pandemic disrupting deal closings, exits slumped 51 percent from the previous year, a report from Invest Europe has found.

Buyout investment from January to June decreased by 16 percent year-on-year from H1 2019 to €24.6 billion across 437 deals, according to Invest Europe’s H1 2020 report, and is down on the €27.6 billion half-year average over the past three years (2017-19).

Compared with the second half of 2019, however, the drop is much more dramatic: overall value and volume of European buyouts in H1 2020 fell about 50 percent and 42 percent, respectively.

Buyout activity, however, continued amid lockdown measures across Europe due to unprecedented levels of dry powder to be deployed and the range of asset classes across which larger GPs invest, industry practitioners told Private Equity International.

“While it doesn’t surprise me that there was an immediate drop off in M&A, how significant that really has been is harder to tell. We continue to see enthusiasm and conversations around new transactions,” said James Howe, a partner at Simpson, Thacher & Bartlett.

He added that a lot of these transactions were signed pre-covid and, for some of them, the challenge was working out how to close them during the pandemic.

Appetite for mega buyouts 

Since the initial lockdown-induced slowdown in the spring, deal activity levels started to pick-up over the summer and are functioning at full speed now, according to Alex Edmondson, partner and head of private equity at Macfarlanes.

Edmondson noted the financial services and professional services sectors have gained a lot of momentum in the past few months as businesses in those sectors have “got to grips with working remotely and managing the current situation better than others”.

Looking at investments by stage, mega buyouts – deals greater than €300 million – was an outlier, with a total of €12.5 billion of equity invested in the first half, compared with €9.5 billion in the previous year. An example is Europe’s biggest buyout deal in a decade, the €17.2 billion acquisition of Thyssenkrupp’s elevator business by a consortium led by Advent International and Cinven.

Large buyouts – between €150 million and €300 million – as well as mid-market and small-cap deals saw annual declines of between 20 percent and 50 percent.

The UK and Ireland was the busiest geography for deal-making in the first half, with €7.5 billion of deals closed, representing nearly a third of total deal value. France and Benelux and the DACH region saw €6.9 billion and €6 billion of investments, respectively.

Deals in communications, computer and electronics accounted for 31 percent of the overall PE deal volume, followed by consumer goods and services at 23 percent.

Dry powder in a downturn

European PE funds raised $43.2 billion in the first three quarters of the year, according to PEI‘s Q3 fundraising report. The largest Europe-dedicated funds that have recently closed and are hunting for opportunities include Nordic Capital, which raised its largest-ever fund in October at €6.1 billion, and Vitruvian Partners, which gathered €4 billion for its fourth fund in July.

For these mega-funds, the concentration of sectors which are attractive to sponsors in the current situation coupled with the continued need to deploy capital has increased competition for good quality assets, Edmondson noted.

“As a result, sponsors may well look at less common types of transaction structure to get money to work, such as minority investments with a longer hold period in businesses which the owners do not want to sell outright or, when disposing of a portfolio company from an earlier fund, looking to reinvest out of a later fund in a minority position alongside the lead buyout sponsor – a so called ‘fund to fund’ deal,” Edmondson said.